The Myth of Chinese Overcapacity Exposed

First was decoupling, then de-risking, now it is “overcapacity”: U.S. and EU leaders have no trouble in finding narratives to justify geopolitical hostility to China. During U.S. Secretary of State Antony Blinken’s recent visit to China, he pointed to the “unfair trade practices” and the potential consequences of “industrial overcapacity” for global and U.S. markets. In China a few days before him, U.S. Treasury Secretary Janet Yellen struck the same chord, while EU Commission head Ursula von der Leyen even lectured President Xi on “overcapacity” during his visit to France. The report on competitiveness which Mario Draghi will present in June, after the European elections, will also blame China for “overcapacity”.

Those transatlantic leaders have focused on China’s so-called “new energy” exports, i.e. electric vehicles (EVs), solar panels, etc., which they insist are invading American and European markets thanks to state subsidies. The term overcapacity should indicate an imbalance between demand (lower) and supply (larger), but it is often misused. In terms of the global demand for energy, there is undercapacity. Especially in Africa, where some 600 million people currently lack access to electricity, most of them in Sub-Saharan Africa. To ensure electrification, they need to import the technology from industrial nations. That is not overcapacity but export of capital goods.

Chinese Foreign Ministry spokesman Lin Jian gave a similar response to a question from Xinhua at his press conference on April 30. “The ‘China overcapacity’ accusation may look like an economic discussion, he said, “but the truth is, the accusation is built on false logic and ignores more than 200 years of the basic concept of comparative advantage in Western economics. All countries produce and export products of their comparative advantage and this is the nature of international trade. If a country should be accused of overcapacity and asked to cut capacity whenever it produces more than its domestic demand, then what would countries trade with?

“If exporting 12% of Chinese-made EVs is called overcapacity, then what about Germany, Japan and the U.S. who export 80, 50 and 25%, respectively, of their automobiles? Wouldn’t that be considered more serious overcapacity?… When the global capacity is still far below the market demand, how could there be ‘overcapacity’?” Lin Jian’s conclusion: “There isn’t a ‘China overcapacity’, but a U.S. overcapacity of anxiety…”

In reality, the attacks on China for “overcapacity” and “unfair competition” are unfounded and geopolitically motivated. In the case of EV, Chinese sales are suffering the same fate as European carmakers. As the daily Handelsblatt reports, in the month of March, Chinese manufacturer BYD sold 160 vehicles in Germany. With the 139 sold in January, and the 94 sold in February, BYD has allegedly “invaded” the German market with a total of 393 EVs in the first quarter of 2024! As a percentage of the overall car market in Germany, this is slightly over 0%. Yards at the Bremerhaven port have been full of unsold BYD cars for weeks. The situation does not look good for German EV manufacturers either, as sales in March plunged 30% year-on-year. Most probably, the potential market for EVs has already been saturated. Now, we are down to a “niche market.”